Variety Growth and the Gains from Trade

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: In this thesis I estimate the gains from trade produced by an increase in imported product varieties in the Swedish economy. This is done by generating a variety adjusted import price index, following the methodology developed by Feenstra (1994) and Broda and Weinstein (2006). By using an estimate of both the extensive and the intensive margins of variety growth, I generate an upper and a lower bound to the gains from variety. Of these, I argue that the true gains from variety between 1995 and 2011 are most likely to be close to the lower bound of 0.578 percent of GDP. This implies that the Swedish consumer would be willing to pay 0.032 percent of his or her income in order to obtain the new set of product varieties imported each year. In addition to this, I test the hypothesis that the gains from variety are decreasing over time. For the period investigated I am unable to reject this hypothesis. This, I argue, is due to the important roles played by a few large trading partners in Swedish imports. Another important factor may be the inability of the method to capture some of the change in the character of trade which the “Digital Age” has brought with it.

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